Global economy weekahead: Downside risks dominate as China GDP looms

Sun Jul 8, 2012 3:04pm EDT
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By Nick Edwards

BEIJING (Reuters) - The global economic outlook for the second half of the year is at risk of a sharp downward revision this week when China, the main driver of world growth, publishes quarterly data that analysts widely expect to be the worst in at least three years.

Economists polled by Reuters reckon annual growth between April and June was the weakest China has seen since the three months to March 2009, back when the grip of the global financial crisis was tight and fiscal and monetary policymakers around the world were compelled to join forces to revive the economy.

A surprise interest rate cut from the People's Bank of China last week - the second in a month - on the same day that the European Central Bank also cut rates and the Bank of England expanded its quantitative easing program - has only served to deepen the downside risks being priced into asset markets.

But too narrow a focus on raw numbers and the apparent inadequacy of action so far to reverse decelerating activity in the United States, Europe and Asia could easily miss the point that in China - the biggest marginal generator of growth - politics are shifting policy into pro-growth high gear.

"In the second half as we get closer to the Communist Party (leadership transition) and GDP growth falls closer to their 7.5 percent target for the year, the government will become much less tolerant of a further slowdown," Zhang Zhiwei, Hong Kong-based chief China economist at Nomura, told Reuters.

The once-a-decade handover of power in China is a showpiece event which the government is determined to ensure takes place against a backdrop of social stability and economic prosperity, the delivery of which the Communist Party says justifies its one-party rule.

So, perversely, the worse the numbers from China look in a week which starts on Monday with inflation data and ends on Friday with Q2 GDP, the greater the likelihood of a policy response to prettify them ahead of the autumn power handover.

"I would imagine the quarter on quarter number will drop below 7 percent (on an annualized basis) and potentially quite a bit below it," Zhang said.   Continued...